Article written by Prieur du Plessis, editor of the Investment Postcards from Cape Town blog.
The following is a partial transcript of Jim Puplava‘s great interview on Financial Sense with Marc Faber, author of the Gloom, Boom & Doom Report. In a wide-ranging interview, they discuss Ben Bernanke, QE3, inflation, gold and much more. Click heretolisten to the audio interview.
Jim Puplava: Marc Faber, the editor of the Gloom, Boom & Doom Report joins us on the program. And Marc, in a recent newsletter, you talked about getting together with some prominent economists; many of whom have been lifelong friends of yours such as Gary Shilling and David Rosenberg. Now, those two were deflationists. Two of you at the get-together were in the inflation camp yourself and Eddie Ardini. I’ve always found it amazing how economists can look at the same data and come to opposite conclusions. Marc, what is it in your backgrounds and line of thinking that makes you come to different conclusions?
Marc Faber: Yeah, that’s a good question. I mean, I think that deflationists, they all have families. They go shopping, their families go shopping, they pay educational cost, they pay healthcare cost, insurance cost and they see the fees on local government services increasing, taxes generally increases. Then I find this hard to believe that they would endorse the concept of deflation. But obviously, they may think that the economy may collapse and that as a result of that, we may have deflation and that, therefore, you should buy long term US government bonds. And my view is, particularly in the deflationist scenario, where you would have like Prechter said the Dow Jones below a thousand. In that scenario, you wouldn’t want to be in US government bonds and in cash for the simple reason that in that scenario, the fiscal deficits — in other words, spending — would exceed tax revenues even more than if you were actually optimistic about the economy. J
ust consider — if the Dow Jones went below a thousand, what kind of an economic environment would we be in? We would be in a total credit collapse. We would be in a total economic collapse. And we would have a complete corporate profit collapse. And in a corporate profit collapse and in an economic depression, what do you think would happen to tax revenues? They would collapse, as well. And so the revenues of the treasury would decline very meaningfully and the fiscal deficit, which is now running, say, optimistically set at one and a half trillion. If you counted the unfunded liability stats are accruing every year. Probably the fiscal deficit is more like two to two and a half trillion dollars. But let’s say one and a half trillion dollars. If that happens, the Dow Jones below a thousand, corporate profits collapsing and revenues collapsing, then the fiscal deficit for sure would be two to three trillion dollars.
And in that environment, the quality of credit of the US — as was suggested by Moody’s yesterday — would decline and US government bonds, which I think are already today junk bonds, would go and yield much more than less than three percent of what they’re yielding at the present time.
So particularly, in the deflationary scenario, you don’t want to be in government bonds.
Jim Puplava: You know, I was reading that you got your PhD; I think it was at the age of 24, if I’m correct. How would you contrast the world as it existed back then, Marc, when you got your degree and the world today as it exists? And more importantly, working in the real world and running your own business, do you have a different view now of how the world works versus your days in academia?
Marc Faber: Well, first of all, I grew up in the fifties and sixties. I was born in ’46 so in the late fifties, I was, say, twelve to fourteen years old. And I have to say, in general, we were much more free than we are today. We had much more freedom to do things and to do stupid things. Today, everything is controlled — not only in the US, but also in Europe — they have become police state where everything is controlled and checked upon either by the police or the IRS or by the PSA or whatever it is. But you are restricted in every movement you make, basically.
Secondly, at the time I grew up, we still had fixed exchange rates. We had Bretton Woods — in other words, a quasi gold standard, which no longer exists today. And the ability to print money today and to run huge trade and current account deficits is much higher today than it was at that time. In ’71 under President Nixon on August 26th, the US went off the gold standard and that led then to the inflation of the seventies and the gold price rising from thirty dollars to eight hundred fifty dollars.
Source: Jim Puplava, Financial Sense, July 15, 2011.
Faber: Ben Bernanke doesn’t understand international economics was first posted on July 18, 2011 at 8:30 am.
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